Parents need to prepare their children to oversee and sustain their inheritance.
Transferring wealth and having it last more than two generations is very difficult, says an article that offers suggestions: “4 Ways to Prepare Children Now to Oversee their Inheritance Later” from Forbes. A decades-long study of 2,500 families found that 70% of family fortunes disappear by just the second generation. By the third generation, that number leaps to 90%.
Why is wealth retention so difficult? One of the key reasons is a lack of preparation. Parents may devote time and resources to ensure that their estate is organized, but they must also prepare their children to oversee and sustain inherited wealth and give them the skills, values and knowledge needed.
How can parents make sure their family wealth endures? Here are a few steps:
Have an estate plan created. This lets you maximize the inheritance left to heirs, by minimizing taxes and asset distribution costs. When the children are minors, name guardians to take care of them and trustees to financially manage their inheritance until you feel they are old enough to do so, themselves.
Give your children a financial education. Children need to be taught how to save, what compound interest can do, how investments work and how money is earned. Let them handle money early and experience the consequences of poor decision making. Better to learn at a young age with small amounts of money, than when they are adults and the stakes are higher.
Let them know what the family’s net worth is and apprise them of any changes. These discussions should be age-appropriate, but financial openness and honesty that starts young eliminates confusion and mixed messages. Give them a small stake in the planning, by allowing them to choose a charity and make a donation to it. Delegating even a small portion of control and letting the child see how it feels to be a steward of wealth is an important lesson.
Encourage children to build their own wealth. Many wealthy parents worry that knowing there is an inheritance in their future will prevent their children from having any ambitions. Grant a limited amount of control over portions of their inheritance at certain ages and teach them about options: investing, saving, donating or spending.
A financial education that starts early and provides time for lessons to be learned will make children at any economic level better prepared for good decision making throughout their lives.
Many executors wonder how to distribute personal items after a family member’s death.
Sometimes, deciding how to divide a family member’s personal items after death can lead to more conflict and bad feelings than dividing up cash and other property. Many executors wonder how they can do this without causing rifts in the family.
According to the article, after their mother’s death at age 93, the co-executors, a brother and a sister, created an inventory of 724 items in her estate that had monetary or sentimental value. These included things like furniture, artwork, oriental rugs, cutlery, china, a piano and a car. They didn’t include their mother’s jewelry, books or linens, or her silver, gold and collectible coins. The four siblings (including the co-executors) all agreed to sell the coins and to deal with the many books, linens, jewelry, and other items more informally.
The family decided not to follow the usual process of taking turns to choose items they wanted. With so many items, that could take a while. Instead, the co-executors gave each sibling an inventory of their mother’s personal property, with the request that each sibling indicate on the inventory the items he or she wanted. This resulted in the 724 items of personal property being divided into three groups: (a) items in which no one had an interest; (b) items in which only one person had an interest; and (c) those desired by two or more siblings. The items in which no one had an interest were sold or given away. The items wanted by only one person went to that person.
The co-executors then distributed to the siblings a list of the items in which more than one of them had expressed an interest. Each sibling was “given” 500 virtual poker chips that he or she could use to bid for the contested items. However, prior to the bidding deadline, the siblings could talk with one another about their intentions and whether they could come to an agreement regarding specific items. Several of the siblings had bid for items in a general category, such as family pictures, bookcases and oriental rugs. They were able to agree among themselves who would receive which items from those general categories, thus preserving their virtual poker chips for what they really wanted.
After the final bids were in, the co-executors announced who won each item, but, to avoid possible conflict or disagreement on values, they did not reveal how much was bid for each item.
Finally, when all the allocations were determined, the co-executors calculated the value of all the items of personal property received by the siblings and readjusted the estate’s cash distributions to ensure that everyone came out in the same place financially. The most valuable items were a 1919 Steinway drawing room grand piano valued at $25,000; a 2005 Toyota Camry valued at $4,500; and some oriental rugs with a total value of $13,975. Those who got the more valuable items had to pay their siblings something for them, with a total of $17,500 trading hands.
Though it was time-consuming, the process avoided the tensions that sometimes result when personal property is distributed. The siblings involved believed their system was fair and even brought them closer together.
Clients know they are supposed to review their estate plans, but don’t know when to do it. Here are twelve times when it makes sense to review your plan.
Estate planning lawyers hear it all the time—people meaning to update their estate plan, but somehow never getting around to actually getting it done. The only group larger than the ones who mean to “someday,” are the ones who don’t think they ever need to update their documents, says the article “12 Different Times When You Should Update Your Will” from Kiplinger. The problems become abundantly clear when people die, and survivors learn that their will or trust is so out-of-date that it creates a world of problems for a grieving family. For the purposes of this article I’ll focus on property planning, meaning wills and trusts, but there are lots of other reasons to review and update your entire estate plan.
There are some wills and trusts that do stand the test of time, but they are far and few between. An obvious example is that some people shift from wills to trusts as their primary estate planning vehicle. Families also undergo all kinds of changes, and those changes should be reflected in the will or trust. Here are twelve times in life when wills and trusts need to be reviewed:
Welcoming a child to the family. The focus is on naming a guardian and a trustee to oversee their finances. The will and trust should be flexible to accommodate additional children in the future. In some cases, a new child may disrupt the estate plan if no provisions are made for them.
Divorce is a possibility. Don’t wait until the divorce is underway to make changes. Do it beforehand. If you die before the divorce is finalized, your spouse will have marital rights to your property. Once you file for divorce, in many states you are not permitted to change your estate plan, until the divorce is finalized. Make no moves here, however, without the advice of your attorney.
Your divorce has been finalized. If you didn’t do it before, update your estate plan now. Don’t neglect updating beneficiaries on life insurance and any other accounts that may have named your ex as a beneficiary.
When your child(ren) marry. You may be able to mitigate the lack of a prenuptial agreement, by creating trusts for your beneficiary, so anything you leave your child will be protected in the case of their divorce.
Your beneficiary has problems with drugs or money. Money left directly to a beneficiary is at risk of being attached by creditors or dissolving into a drug habit. Updating your estate plan to includes trusts that allow a trustee to only distribute funds under optimal circumstances protects your beneficiary and their inheritance for both themselves and for later beneficiaries.
Named executor, trustee or beneficiary dies. Your old will or trust may have a contingency plan for what should happen if a beneficiary, executor or trustee dies, but you should probably revisit the plan. Many times, clients have one answer for what happens if a fiduciary or beneficiary die while it is hypothetical, but feel differently once it happens. If a named executor or trustee dies and you don’t update the estate plan, then what happens if the second dies?
A young family member grows up. Most people name a parent as their executor or trustee, then a spouse or trusted sibling. Two or three decades go by. An adult child may now be ready to take on the task of handling your estate. This is one of the most obvious and common reasons for a younger client to update their estate plan.
New laws go into effect. In recent months, there have been many big changes to the law that impact estate planning, from the SECURE Act to the CARES act. Ask your estate planning attorney every few years, if there have been new laws that are relevant to your estate plan. It is also a great idea to subscribe to legal blogs (like this one) to stay up to date on changes.
An inheritance, windfall or downfall. If you come into a significant amount of money, your tax liability changes. You’ll want to update your will, so you can do efficient tax planning as part of your estate plan.
Can’t find your will and/or trust? If you can’t find the original documents, especially with the will, then you need new documents. Copies of wills may only be probated with extra steps, so it is far better to redo the documents which will also serve to update it legally.
Buying property in another country or moving to another country. Some countries have reciprocity with America. However, transferring property to an heir in one country may be delayed, if the will needs to be probated in another country. Ask your estate planning attorney, if you need wills for each country in which you own property. It is also worth considering changes if you acquire real property in a new state which may require probating in two states.
Family and friends are enemies. Friends have no rights when it comes to your estate plan. If you suspect that your family may push back to any bequests to friends, consider adding a “No Contest” clause to disinherit family members who try to elbow your friends out of the estate.
In all cases, it is important to review your estate plan every few years, but looking for these reasons to update our estate plan will help. Changing your estate plan is also not as involved as one might think. Changes to wills often require a new will, changes to trusts take a variety of forms (see here https://galligan-law.com/amending-a-trust-what-are-your-options/) but are often not very involved.
If you haven’t reviewed your estate plan recently or need assistance with a review or updates, please call our office today.
